HL Economics

taxation redistributing income

Identify two ways that the government can use taxation to redistribute income. (200 – 300)

One way the government can redistribute income using taxation is to use progressive direct taxation, where a higher proportion of income is taken as the income increases, where as a lower-income household can give a smaller proportion of their income in taxes. The idea of this method of taxation is to make the rich poorer by taking more money from them, and making the poor richer in comparison by taking less money from them and giving them goods and services from the rich’s taxes.

Another way governments can redistribute income is by charging and indirect tax on luxury goods, while charging no indirect tax on necessities. For examples, the government may charge a high sales tax on yachts, a good only the rich will purchase, making the rich poorer. Meanwhile, bread is not taxed, so the poor have more money to spend, since they do not have an option to not purchase this good, whereas the rich can choose to not buy a yachts. Taxing certain goods more that others can also redistribute income.